Why Spain's Unemployment Nightmare Is So Much Worse Than Greece's

Liberty Street Economics, blog of the New York Fed,
released a report comparing unemployment and GDP rates in
Greece and Spain, two economies that are in terrible shape.

Both countries have very similar unemployment rates in excess of
25 percent, with job losses most concentrated amongst males and
younger workers. The chart below shows the two countries have
similar unemployment trajectories since early 2008:

Liberty Street
Economics

However, while the spike in unemployment occurred in both nations
on a similar timeframe, one country has experience a much more
modest decline in GDP:

Liberty Street Economics

Liberty Street has a few answers to why Spain’s job losses, when
compared to Greece's, have vastly exceeded their corresponding
decrease in output:

One contributing factor is the fact that the composition of
Spanish jobs made the economy vulnerable to dramatic job losses
during a recession. In 2007, almost 13 percent of
jobs in Spain were in construction, compared with
roughly 8 percent in Greece and the euro area…Another
contributing factor is the very high percentage of employees tied
to temporary work contracts in Spain. Data from the Organisation
for Economic Co-operation and Development show that
32 percent of employees in Spain worked under
temporary contracts and 68 percent under permanent
contracts in 2007. In Greece, 10 percent were on temporary
contracts; the figure for Europe as a whole was 15 percent.

This suggests that structural imbalances are the reason behind
Spain’s unusually high unemployment rate relative to GDP decline.

Examining the Spanish story, Liberty Street sees a lesson to be
learned:

Spain’s employment experience relative to the rest of the euro
area illustrates the cost to the economy of firms having
such a high level of flexibility in how they manage
workers.

It appears that the very same flexibility that enables businesses
to cut costs to improve their bottom line during a downturn also
exacerbates the struggles of the labor market and magnifies the
economic malaise.